Markets surge after US avoids cliff edge

GLOBAL stock markets made a roaring start to the new year – with the FTSE 100 Index breaking through the 6,000-point barrier for the first time in 18 months – after a last-ditch deal to prevent the US falling over the “fiscal cliff”.

The stock market soared on the news from America that a deal had been struck

A huge relief rally was sparked after American lawmakers approved a plan to avoid a £370billion package of automatic spending cuts and tax rises which could have sent the world’s biggest economy sliding back into recession.

While Congress backed a bill calling for higher taxes for individuals earning more than $400,000 and $450,000 for couples, decisions on spending cuts have been delayed for two months.

Analysts warned the compromise deal is only a small step towards controlling the federal deficit, setting the stage for fresh confrontations as Republicans press for cuts to entitlement programmes such as Medicare in return for agreeing to a rise in America’s $16.4trillion legal borrowing limit.

But investors made hay, piling into riskier assets which helped strengthen the euro against the dollar.

Borrowing costs for struggling European economies such as Spain eased, while Spanish and Italian stock markets surged over 3 per cent.

it represents an important step forward and should put to rest those fears of a doomsday scenario

Jason Hollands of investment adviser Bestinvest

Nearly £33billion was added to the value of Britain’s leading shares as the FTSE 100 Index climbed 129.5 points to 6027.4 – its first break above 6,000 since July 2011.

Jason Hollands, of investment adviser Bestinvest, said: “The deal is not a full resolution of the fiscal cliff as fundamentally it addresses only one side of the equation – the extent of tax rises. Decisions over the depth of spending cuts have been deferred to provide more time to reach an agreement. Sizeable cuts are inevitable, with greater clarity to come in the months ahead but it represents an important step forward and should put to rest those fears of a doomsday scenario. It removes another short-term cause of uncertainty that has dented both business and market confidence.”

Shore Capital strategist Gerard Lane added: “Agreeing to put taxes up a little and delay an agreement over spending cuts until the end of February looks like a bungee jump to us. The outcome of a bungee jump is that you eventually end lower than where you started but it is great to fly back up.”